-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, lgoemyVXTcUNlcKiUIxMEoT7yAP65H1Mvma9JGvOcK4wHSUAhTjUavxhYN9FByrJ hXV6z1jEdZ+k1CdkFGmjwA== 0000039911-95-000015.txt : 19950424 0000039911-95-000015.hdr.sgml : 19950424 ACCESSION NUMBER: 0000039911-95-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950128 FILED AS OF DATE: 19950421 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GAP INC CENTRAL INDEX KEY: 0000039911 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 941697231 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07562 FILM NUMBER: 95530172 BUSINESS ADDRESS: STREET 1: ONE HARRISON CITY: SAN FRANCISCO STATE: CA ZIP: 94105 BUSINESS PHONE: 4159524400 MAIL ADDRESS: STREET 1: ONE HARRISON STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94105 FORMER COMPANY: FORMER CONFORMED NAME: GAP STORES INC DATE OF NAME CHANGE: 19850617 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended January 28, 1995 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the transition period from ______________ to ______________ Commission File Number 1-7562 THE GAP, INC. (Exact name of registrant as specified in its charter) Delaware 94-1697231 (State of Incorporation) (I.R.S. Employer Identification No.) One Harrison San Francisco, California 94105 (Address of principal executive offices) Registrant's telephone number, including area code: (415) 952-4400 _______________________ Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.05 par value New York Stock Exchange, Inc. (Title of class) Pacific Stock Exchange, Inc. (Name of each exchange where registered) Securities registered pursuant to Section 12(g) of the Act: None _______________________ Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non- affiliates of the Registrant as of March 27, 1995 was approximately $3,521,877,118, based upon the last price reported for such date in the NYSE-Composite transactions. The number of shares of the Registrant's Common Stock outstanding as of March 27, 1995 was 143,900,233. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 1995 (hereinafter referred to as the "1995 Proxy Statement") are incorporated into Parts I and III. Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended January 28, 1995 (hereinafter referred to as the "1994 Annual Report to Stockholders") are incorporated into Parts II and IV. PART I Item 1 - BUSINESS General The Gap, Inc. (hereinafter referred to as the "Company") is an international specialty retailer which operates stores selling casual apparel, shoes and other accessories for men, women and children under a number of trade names, including: Gap, GapKids, babyGap, Banana Republic, and Old Navy Clothing Co. The Company was incorporated in the State of California in July 1969 and was reincorporated under the laws of the State of Delaware in May 1988. On March 27, 1995, the Company operated 1,525 stores, including 810 Gap, 330 GapKids, 192 Banana Republic, and 65 Old Navy Clothing Co. stores (49 of the Gap and GapKids stores are located in the United Kingdom, 73 are located in Canada and 3 are located in France; 3 of the Banana Republic stores are located in Canada). All of the Company's merchandise is private label. The Gap stores offer casual clothing for men and women. GapKids was introduced in 1986 to provide well-designed, comfortable clothing for boys and girls ages 2-12. The babyGap line, offering mostly natural fiber clothing for infants and toddlers, was added in 1990 and is sold in most GapKids stores. Banana Republic offers classic, casual fashions for men and women. Old Navy Clothing Co. was introduced in 1993 under the name Gap Warehouse and offers basic and fashion casual clothing for men, women and children at lower price points. Recent Developments 1994, the Company's twenty-fifth anniversary year, was one of record sales and earnings. However, performance in 1994 was stronger in the first half than in the second half, when compared to the prior year, and the Company ended fiscal 1994 with comparable store sales growth of only 1%. The Company is continuing to experience difficult competitive conditions in 1995; for the first two months of fiscal 1995, the Company's comparable store sales declined 5%. In addition, over the past two years the Company has operated at near record levels of merchandise margin when compared to the same periods of previous years, making current and future comparisons more challenging. This is especially true in the first half of fiscal 1995. Merchandise Inventory, Replenishment and Distribution The retail apparel specialty business fluctuates according to changes in customer preferences dictated by fashion and season. These fluctuations especially affect the inventory owned by apparel retailers, since merchandise usually must be ordered well in advance of the season and sometimes before fashion trends are evidenced by customer purchases. The Company is vulnerable to changing fashion trends, particularly when it emphasizes fashion items versus basics, as it did to some extent in fiscal year 1994. In addition, the cyclical nature of the retail business requires the Company to carry a significant amount of inventory, especially prior to peak selling seasons when the Company and other retailers generally build up their inventory levels. The Company must enter into contracts for the purchase and manufacture of private label apparel well in advance of the applicable selling season. As a result, the Company is vulnerable to demand and pricing shifts and to errors in selection and timing of merchandise purchases. The Company reviews its inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and may use markdowns to clear merchandise. Markdowns may be used if inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, or if it is determined that the inventory in stock will not sell at its currently marked price. Such markdowns may have an adverse impact on earnings, depending on their extent and the amount of inventory affected. Because the Company does not carry much replenishment inventory in its stores, replenishment inventory is maintained in the Company's distribution centers in California, Kentucky, Maryland and Canada and in a distribution center owned and operated by a third party in the United Kingdom, and then shipped to the stores. Store Operations and Expansion The Company's stores offer a shopper-friendly environment with a select assortment of casual clothing and accessories which emphasize style, quality and good value. The range of apparel displayed in each store varies significantly depending on the selling season and the size of the store. The Company's stores generally are open seven days per week (where permitted by law), three to six nights per week and most holidays. All sales are made for cash or personal checks or on credit cards issued by others. The Company opened 172 new stores and expanded 82 stores during the 1994 fiscal year; the Company anticipates that it will open approximately 175 to 200 new stores and expand approximately 50 to 70 stores during the 1995 fiscal year. Over the past five years, the Company has increased the average size of its new stores and expanded the size of existing stores. For fiscal year 1994, the average size of new stores was about 7,200 square feet for Gap, 4,700 square feet for GapKids, 6,200 square feet for Banana Republic, and 15,400 square feet for Old Navy Clothing Co. Expanded stores are excluded from comparable store calculations until they have been open over one year in their new size. The Company's continued success depends, in part, upon its ability to increase sales at existing store locations, to open new stores and to operate stores on a profitable basis. There can be no assurance that the Company's growth will result in enhanced profitability or that it will continue at the same rate in future years. In addition, the Company's strategy of expanding domestically through new concepts (such as Old Navy Clothing Co.) and new product lines (such as personal care items), and internationally in countries in which the Company has no, or limited, operating history could result in reduced profitability if such expansion is not successful. Currently, the Company is planning to open 3-6 Gap and GapKids stores in Japan during fiscal 1995. Suppliers The Company purchases merchandise from over 1,000 suppliers located domestically and overseas. No supplier accounted for more than 5% of the Company's fiscal 1994 purchases. Suppliers are required to manufacture the Company's private-label merchandise according to the Company's specifications. During fiscal 1994, approximately 30% of the Company's merchandise was produced domestically while the remaining 70% was imported from overseas vendors. Approximately 18% of foreign dollar purchases were from Hong Kong, or about 14% of the Company's total merchandise, with the remainder coming from 46 other countries. Any event causing a sudden disruption of imports from Hong Kong, including the imposition of additional import restrictions, could have a materially adverse effect on the Company's operations. Substantially all of the Company's foreign purchases are negotiated and paid for in U.S. dollars. The Company cannot predict whether any of the foreign countries in which its products are currently manufactured or any of the countries in which the Company may manufacture its products in the future will be subject to future import restrictions by the U.S. government, including the likelihood, type or effect of any trade retaliation. For example, recently the United States government considered imposing various restrictions on the importation of goods from China. Trade restrictions, including increased tariffs or quotas, or both, against apparel items could affect the importation of apparel generally, and, in that event, could increase the cost or reduce the supply of apparel available to the Company and adversely affect the Company's business, financial condition and results of operations. In addition, the Company's import operations may be adversely affected by political instability resulting in the disruption of trade from exporting countries, significant fluctuation in the value of the U.S. dollar against foreign currencies and restrictions on the transfer of funds. Seasonal Business The Company's business follows a seasonal pattern, peaking over a total of about 10 weeks during the late summer (August through early September) and holiday (Thanksgiving through Christmas) periods. During fiscal year 1994, these periods accounted for approximately 30% of the Company's annual sales. Competition The Company's business is highly competitive. The Company's stores compete with national and local department, specialty and discount store chains and independent retail stores which handle similar lines of merchandise. Some competitors have larger sales and assets than the Company. Depth of selection in sizes, colors and styles of merchandise, merchandise procurement and pricing, ability to anticipate fashion trends and customer preferences, inventory control, reputation, quality of merchandise, store design and location, advertising and customer service are all important factors in competing successfully in the retail industry. Given the large number of companies in the retail industry, the Company cannot estimate the number of its competitors or its relative competitive position. The performance of the Company in recent years has increased imitation by other retailers. Such imitation has made and will continue to make the retail environment in which the Company operates more competitive. In addition, the success of the Company's operations depends upon a number of factors relating to consumer spending, including future economic conditions affecting disposable consumer income such as employment, business conditions, interest rates and taxation. A decline in consumer spending could adversely affect the Company's net sales and profitability. Advertising The Company's marketing strategy primarily involves advertising in major metropolitan newspapers and their Sunday magazines and in major news weeklies, with smaller amounts of print advertising in lifestyle and fashion magazines. Other advertising media include various outdoor venues, such as bus shelters, mass transit posters, billboards, telephone kiosks and exterior bus panels, including double-decker London buses. Employees On January 28, 1995, the Company had a work force of approximately 55,000 employees. Additionally, the Company hires temporary employees during the peak late summer and holiday seasons. The Company considers its employee relations to be good. Trademarks and Service Marks The trademarks and service marks for Gap, GapKids, babyGap, Banana Republic and Old Navy Clothing Co., and other trademarks either have been registered, or have trademark applications pending, with the United States Patent and Trademark Office and with the registries of many foreign countries. Executive Officers of the Registrant The Chairman and Chief Executive Officer of the Company is Donald G. Fisher. Millard S. Drexler is the President and Chief Operating Officer of the Company and Chief Executive Officer of the operating divisions. Robert J. Fisher is Executive Vice President and Chief Financial Officer of the Company. Each of Messrs. Donald G. Fisher, Robert J. Fisher and Drexler is a director of the Company and the required information with respect to each of them is set forth in the table located in the Section entitled "Nominees for Election as Directors" of the 1995 Proxy Statement and is incorporated by reference herein. The following are also executive officers of the Company: Name Age Position Patricia DeRosa 42 President, GapKids Division William S. Fisher 38 President, International Division Magdalene Gross 46 Executive Vice President - Advertising Anne B. Gust 37 Senior Vice President - General Counsel Warren R. Hashagen 44 Senior Vice President - Finance Richard M. Lyons 38 Executive Vice President, The Gap, Inc. and President, Gap Division Ms. DeRosa joined the Company in 1975 and has served as President, GapKids Division since July 1993. From August 1992 to July 1993 she was Executive Vice President, Gap Division and from March 1991 to August 1992 she served as Executive Vice President - Merchandising, Gap Division. From April 1989 to March 1991 she was Senior Vice President, General Merchandise Manager, Men's, Gap Division. Mr. William S. Fisher joined the Company in 1984 and has served as President, International Division since July 1993. From August 1992 to July 1993 he was Executive Vice President, International Division and from April to August 1992 he served as Senior Vice President - International, Gap Division in charge of United Kingdom and Canada operations. He served as Senior Vice President - International from April 1991 to April 1992 and as Vice President - International, Canada Operations from December 1989 to April 1991. Ms. Gross joined the Company in 1984 and has served as Executive Vice President - Advertising, Gap Division since April 1992. From 1989 to 1992, she was Senior Vice President - Advertising. Ms. Gust joined the Company in 1991 and has served as Senior Vice President - General Counsel since April 1994. From April 1993 to April 1994 she was Vice President - General Counsel; from June 1992 until April 1993, she was Associate General Counsel and Managing Attorney and from August 1991 until May 1992 she was Associate General Counsel. From 1986 until August 1991, she was associated with the law firm of Brobeck, Phleger & Harrison. Mr. Hashagen joined the Company in 1982 and has served as Senior Vice President - Finance since April 1992. From February 1991 to April 1992, he was Senior Vice President - Finance and Treasurer. He served as Vice President, Treasurer from 1988 to 1991. Mr. Lyons was promoted to Executive Vice President, The Gap, Inc. in March 1995, in charge of Gap and GapKids Divisions. He joined the Company in 1984 and has served as President, Gap Division since July 1993. From August 1992 to July 1993 he was Executive Vice President, GapKids Division and from November 1989 to August 1992 he was Senior Vice President - General Merchandise Manager, GapKids Division. Item 2 - PROPERTIES During fiscal year 1994, the Company opened 172 stores and closed 34. The newly-opened stores include 54 Gap stores (including 5 stores in the United Kingdom, 8 stores in Canada and 1 store in France), 60 GapKids stores (including 6 stores in the United Kingdom, 5 stores in Canada and 1 store in France), 12 Banana Republic stores, and 46 Old Navy Clothing Co. stores. In addition, during fiscal year 1994, the Company expanded 82 stores. The expanded stores include 48 Gap stores (including 2 stores in the United Kingdom and 2 stores in Canada), 22 GapKids stores (including 1 in the United Kingdom and 1 in Canada), 11 Banana Republic stores and 1 Old Navy Clothing Co. store. The 1,508 stores operating on January 28, 1995 aggregated approximately 9.2 million square feet. The Company leases virtually all of its store premises for terms generally ranging from 12 to 15 years. Most leases provide for additional rent based on a percentage of store sales in addition to or in lieu of minimum rentals, as well as for the payment of certain other expenses. Some leases contain cancellation clauses in favor of the Company if specified sales levels are not achieved. In the United States, the Company's stores are located in all of the 50 largest metropolitan statistical areas. During fiscal year 1995, the Company plans to increase store space by approximately 20%, after taking into account store closings. This increase is expected to include the opening of approximately 175 to 200 new stores worldwide and the expansion of approximately 50 to 70 of the Company's existing stores. The Company leases its headquarters and regional office buildings, as well as its Eastern Distribution Center (EDC). The EDC in Erlanger, Kentucky consists of approximately 1,220,000 square feet. It distributes Gap, GapKids and Banana Republic merchandise and its lease term runs through February 28, 2003, with options to extend the lease for an additional 30 years. The Company owns its Canadian Distribution Center located in Brampton, Ontario. It consists of approximately 150,000 square feet and distributes Gap and GapKids merchandise. The Company also owns its Western Distribution Center (WDC) located in Ventura, California. This facility, which is approximately 344,000 square feet, distributes Gap and GapKids merchandise. The Company also owns an adjacent five acre parcel for possible future expansion. The Atlantic Distribution Center (ADC), a facility owned by the Company in Edgewood, Maryland, covers approximately 745,000 square feet and distributes Gap merchandise. The Company also owns 156 additional acres, portions of which could be used for potential expansion of the ADC. The Company has entered into negotiations to acquire land in Gallatin, Tennessee for the purpose of constructing a distribution center at an estimated total cost of approximately $45-55 million. If the negotiations are successful, the Company expects the facility to be in operation by the holiday season of 1996. The Company also owns and operates a data center located on seven acres of land in Rocklin, California; it covers approximately 40,000 square feet and serves as a corporate computer processing center. The Company continues to explore alternatives for expanding its headquarters facilities in San Francisco and San Bruno, California. Item 3 - LEGAL PROCEEDINGS The Company is a party to routine litigation incident to its business. Some of the lawsuits to which the Company is a party are covered by insurance and are being defended by the Company's insurance carriers. The Company has established reserves which management believes are adequate to cover any litigation losses which may occur. Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II Item 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference to page 21 of the 1994 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. Item 6 - SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to pages 18 and 19 of the 1994 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference to pages 20 and 21 of the 1994 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ($000) January 28, 1995 January 29, 1994 Accrued Payroll $32,624 $27,238 The remaining information required by this item is incorporated herein by reference to pages 22-32 of the 1994 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. Item 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference to the Section entitled "Nominees for Election as Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the 1995 Proxy Statement. See also Item 1 above. Item 11 - EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the Sections entitled "Compensation of Directors," "Executive Compensation" and "Employment Contracts and Termination of Employment Arrangements" in the 1995 Proxy Statement. Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the Section entitled "Beneficial Ownership of Shares" in the 1995 Proxy Statement. Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the Sections entitled "Other Reportable Transactions" in the 1995 Proxy Statement. PART IV Item 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K A. The following consolidated financial statements, schedules and exhibits are filed as part of this report or are incorporated herein as indicated. (1) Financial Statements (i) Independent Auditors' Report. Incorporated by reference to Page 22 of the 1994 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. (ii) The consolidated balance sheets as of January 28, 1995 and January 29, 1994 and the related consolidated statements of earnings, cash flows, and stockholders' equity for each of the three fiscal years in the period ended January 28, 1995 are incorporated by reference to pages 23-32 of the 1994 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. (2) Financial Statement Schedules Schedules have been omitted because they are not required or are not applicable or because the information required to be set forth therein either is not material or is included in the financial statements or notes thereto. Individual financial statements of the Company have been omitted since the Company is primarily an operating Company and the indebtedness of the wholly owned subsidiaries to any person other than the Company does not exceed five percent of the total assets. (3) Exhibits Incorporated herein by reference is a list of the Exhibits contained in the Exhibit Index which begins on sequentially numbered page 10 of this Report. (4) Reports on Form 8-K No reports on Form 8-K were filed or required to be filed for the last quarter of the fiscal year. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE GAP, INC. Date: April 14, 1995 By /s/ Donald G. Fisher Donald G. Fisher, Chairman and Chief Executive Officer (Principal Executive Officer) Date: April 14, 1995 By /s/ Robert J. Fisher Robert J. Fisher, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: April 14, 1995 By /s/ Adrian D. P. Bellamy Adrian D. P. Bellamy, Director Date: April 14, 1995 By /s/ John G. Bowes John G. Bowes, Director Date: April 14, 1995 By /s/ Millard S. Drexler Millard S. Drexler, Director Date: April 14, 1995 By /s/ Donald G. Fisher Donald G. Fisher, Director Date: April 14, 1995 By /s/ Doris F. Fisher Doris F. Fisher, Director Date: April 14, 1995 By /s/ Robert J. Fisher Robert J. Fisher, Director Date: April 14, 1995 By /s/ Lucie J. Fjeldstad Lucie J. Fjeldstad, Director Date: April 14, 1995 By /s/ William A. Hasler William A. Hasler, Director Date: April 14, 1995 By /s/ John M. Lillie John M. Lillie, Director Date: April 14, 1995 By /s/ Charles R. Schwab Charles R. Schwab, Director Date: April 14, 1995 By /s/ Brooks Walker, Jr. Brooks Walker, Jr., Director THE GAP, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 28, 1995 EXHIBIT INDEX 3.1 Registrant's Amended and Restated Certificate of Incorporation, filed as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 3.2 Registrant's By-Laws, filed as Exhibit C to Registrant's definitive proxy statement for its annual meeting of stockholders held on May 24, 1988, Commission File No. 1-7562. 10.1 Credit Agreement, dated as of March 2, 1990, among Registrant and Citibank, N.A.; Bank of America National Trust & Savings Association; Continental Bank N.A.; National Westminster Bank PLC; Security Pacific National Bank; Deutsche Bank, AG New York Branch and Cayman Islands Branch; Harris Trust and Savings Bank; NCNB National Bank of North Carolina; The Royal Bank of Canada; Algemene Bank Nederland N.V., Cayman Islands Branch; The Sumitomo Bank Limited; and Swiss Bank Corporation, filed as Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the year ended February 3, 1990, Commission File No. 1-7562. 10.2 Amendment to Credit Agreement, dated as of March 4, 1991, filed as Exhibit 10.7 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562. 10.3 Second Amendment to Credit Agreement, dated as of September 16, 1992, filed as Exhibit 10.3 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.4 Third Amendment to Credit Agreement, dated as of January 22, 1993, filed as Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.5 Fourth Amendment to Credit Agreement, dated as of February 4, 1994, filed as Exhibit 10 to Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 1994, Commission File No. 1-7562. 10.6 Lease Agreement (Eastern Distribution Center), dated as of July 6, 1979, between Registrant and Corporate Property Associates, filed as Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year ended February 3, 1980, Commission File No. 1-7562. 10.7 Amendment to Lease Agreement (Eastern Distribution Center), dated as of October 10, 1986, filed as Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1988, Commission File No. 1-7562. 10.8 Second Amendment to Lease Agreement (Eastern Distribution Center), dated as of February 16, 1988, filed as Exhibit 10.11 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1988, Commission File No. 1-7562. 10.9 Lease Agreement (Kentucky Distribution Center), dated as of February 16, 1988, between Registrant and Corporate Property Associates 7, filed as Exhibit 10.12 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1988, Commission File No. 1-7562. 10.10 Lease Agreement (One Harrison, San Francisco), dated as of September 1, 1987, between Registrant's wholly-owned subsidiary, Banana Republic, Inc. ("Banana Republic"), and JMC Associates Limited Partnership, filed as Exhibit 10.13 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1988, Commission File No. 1-7562. 10.11 First Amendment to Lease Agreement (One Harrison, San Francisco), dated as of December 21, 1987, filed as Exhibit 10.14 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.12 Second Amendment to Lease Agreement (One Harrison, San Francisco), dated as of October 16, 1991, filed as Exhibit 10.15 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.13 Sublease Agreement (One Harrison, San Francisco), dated as of December 21, 1987, between Registrant's wholly- owned subsidiary, Banana Republic, Inc. and Hillman Properties West, Inc., filed as Exhibit 10.14 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1988, Commission File No. 1-7562. 10.14 First Amendment to Sublease Agreement (One Harrison, San Francisco), dated as of December 17, 1990, filed as Exhibit 10.17 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.15 Second Amendment to Sublease Agreement (One Harrison, San Francisco), dated as of September 30, 1991, filed as Exhibit 10.18 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.16 Third Amendment to Sublease Agreement (One Harrison, San Francisco), dated as of October 16, 1991, filed as Exhibit 10.19 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.17 Lease Agreement (Two Harrison, San Francisco), dated as of May 31, 1991, between Registrant and Harrison Plaza, Ltd., a California limited partnership, filed as Exhibit 10.20 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, Commission File No. 1-7562. 10.18 Purchase Agreement (Atlantic Distribution Center), dated as of April 9, 1990, between Registrant and Greater Harford Industrial Park Partnership, filed as Exhibit 10.13 to Registrant's Annual Report on Form 10-K for the year ended February 3, 1990, Commission File No. 1-7562. 10.19 Purchase and Installation Agreement (Materials Handling Equipment for Atlantic Distribution Center), dated as of December 18, 1990, between Registrant and Computer Aided Systems, Inc. filed as Exhibit 10.17 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562. 10.20 Construction Agreement (Atlantic Distribution Center), dated as of July 31, 1990, between Registrant and Robert A. Kinsley, Inc., filed as Exhibit 10.18 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562. 10.21 Purchase Agreement (Rocklin Data Center), dated as of November 20, 1990, between Registrant and Stanford Ranch, Inc., filed as Exhibit 10.19 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562. 10.22 Construction Agreement (Rocklin Data Center), dated as of January 11, 1991, between Registrant and The Austin Company, filed as Exhibit 10.20 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562. 10.23 Purchase Agreement (Canadair Corporate Jet), dated as of July 11, 1991, between Registrant and Canadair Challenger, Inc., a Delaware corporation, filed as Exhibit 10.26 to Registrant's Annual report on Form 10-K for the year ended February 1, 1992, 10.24 Construction Agreement, dated as of January 1, 1992, between Registrant and Fisher Development, Inc., filed as Exhibit 10.26 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.25 Letter Agreement, dated as of December 17, 1992, amending the Restated Construction Agreement between Registrant and Fisher Development, Inc., filed as Exhibit 10.27 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.26 1981 Stock Option Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54690. 10.27 Form of Nonqualified Stock Option Agreement under Registrant's 1981 Stock Option Plan, filed as Exhibit 4.2 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54690. 10.28 Management Incentive Restricted Stock Plan II, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54686. 10.29 Form of Restricted Stock Agreement under Registrant's Management Incentive Restricted Stock Plan II, filed as Exhibit 4.2 to Registrant's Registration Statement on Form S-8, Commission File No. 33-54686. 10.30 GapShare, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-40505. 10.31 Nonqualified Supplemental Executive Retirement Plan, effective January 1, 1988, filed as Exhibit 10.29 to Registrant's Annual Report on Form 10-K for the year ended February 3, 1990, Commission File No. 1-7562. 10.32 Description of Management Incentive Cash Award Plan filed as Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year ended January 29, 1994, Commission File No. 1-7562. 10.33 Employee Stock Purchase Plan, filed as Exhibit 4.1 to Registrant's Registration Statement on Form S-8, Commission File No. 33-56021. 10.34 Amended and Restated Executive Management Incentive Cash Award Plan, filed as Exhibit B to the Registrant's definitive proxy statement for its annual meeting of stockholders held on May 23, 1995, Commission File No. 1-7562. 10.35 Deferred Compensation Plan filed as Exhibit 10.36 to Registrant's Annual Report on Form 10-K for the year ended January 29, 1994, Commission File No. 1-7562. 10.36 Executive Capital Accumulation Plan. 10.37 Relocation Loan Plan, filed as Exhibit A to Registrant's definitive proxy statement for its annual meeting of stockholders held on October 25, 1977, Commission File No. 1-7562. 10.38 Certificate of Corporate Resolution amending the Relocation Loan Plan, adopted by the Board of Directors on November 27, 1990, filed as Exhibit 10.34 to Registrant's Annual Report on Form 10-K for the year ended February 2, 1991, Commission File No. 1-7562. 10.39 Agreement, dated as of October 22, 1985, between Registrant and Millard S. Drexler, together with an amendment thereto dated as of November 21, 1985, filed as Exhibits 19.1 and 19.2, respectively, to Registrant's Quarterly Report on Form 10-Q for the quarter ended November 2, 1985, Commission File No. 1-7562. 10.40 Amendment to the Agreement between Registrant, Millard Drexler and Donald Fisher, dated October 23, 1992, filed as Exhibit 10.38 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.41 Amended and Restated Restricted Stock Agreement, dated January 30, 1992, between Registrant and Millard Drexler, filed as Exhibit 10.39 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.42 First Amendment to the Amended and Restated Restricted Stock Agreement, dated October 23, 1992, between Registrant and Millard Drexler, filed as Exhibit 10.40 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.43 Restricted Stock Award Agreement, dated April 13, 1992, between Registrant and Millard Drexler, filed as Exhibit 10.41 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.44 First Amendment to Restricted Stock Award Agreement, dated October 23, 1992, between Registrant and Millard Drexler, filed as Exhibit 10.42 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 10.45 Non-Employee Director Retirement Plan, dated October 27, 1992, filed as Exhibit 10.43 to Registrant's Annual Report on Form 10-K for the year ended January 30, 1993, Commission File No. 1-7562. 11 Computation of Earnings per Share. 13 Registrant's annual report to security holders for the fiscal year ended January 28, 1995. 21 Subsidiaries of Registrant. 23 Consent of Deloitte & Touche. 27 Financial Data Schedule EX-10.36 2 THE GAP, INC. EXECUTIVE CAPITAL ACCUMULATION PLAN THE GAP, INC. (the "Company") hereby establishes The Gap, Inc. Executive Capital Accumulation Plan, effective April 1, 1994, for the benefit of a select group of management and highly compensated employees of the Company and its participating Affiliates, in order to provide such employees with certain deferred compensation benefits. The Plan is an unfunded deferred compensation plan that is intended to qualify for the exemptions provided in sections 201, 301, and 401 of ERISA. SECTION 1 DEFINITIONS The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context: 1.1 "Affiliate" shall mean a corporation, trade or business which is, together with the Company, a member of a controlled group of corporations or an affiliated service group or under common control within the meaning of section 414(b), (c), (m) or (o) of the Code. 1.2 "Board" shall mean the Board of Directors of the Company, as from time to time constituted. 1.3 "Code" shall mean the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section. 1.4 "Committee" shall mean the Retirement Committee appointed pursuant to GapShare, the qualified profit sharing plan maintained by the Company. 1.5 "Company" shall mean The Gap, Inc. 1.6 "Deferral Contributions" shall mean the amounts credited to Participants' Accounts under the Plan pursuant to their deferral elections made in accordance with Section 2.2. 1.7 "Eligible Employee" shall mean an Employee of an Employer who is employed at the level of "executive vice president" or higher and who has a Salary greater than 300% of the Social Security taxable wage base. Eligible Employee shall not include any Employee who is employed in a foreign country, unless he or she has been temporarily transferred to employment with an Employer in a foreign country and is a citizen or resident alien of the United States at the time of the transfer. An Employee's eligibility for the first Plan Year shall be determined as of February 1, 1994. An Employee's eligibility for any following Plan Year shall be determined as of November 1 of the preceding Plan Year, based on the Employee's position and salary and on the taxable wage base in effect on that date; provided, however, that in the case of an Employee who first satisfies the conditions for being an Eligible Employee on or before June 1 of any Plan Year (other than the first Plan Year), eligibility shall be determined as of that June 1. If a Participant ceases to be an Eligible Employee, no further Deferral Contributions shall be made to the Plan on his or her behalf unless he or she is again determined to be an Eligible Employee, but the balance credited to his or her Account shall continue to be credited with earnings under the terms of the Plan, and shall be distributed to him or her at the time and in the manner set forth in Section 5. 1.8 "Employee" shall mean an individual who is employed by one of the Employers as a common-law employee. 1.9 "Employer" shall mean the Company and each participating Affiliates. At such times and under such conditions as the Board may direct, one or more other Affiliates may become participating Affiliates or a participating Affiliate may be withdrawn from the Plan. 1.10 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. Reference to a specific section of ERISA shall include such section, any valid regulation promulgated thereunder, and any comparable provision of any future legislation amending, supplementing or superseding such section. 1.11 "Participant" shall mean an Eligible Employee who has become a Participant in the Plan pursuant to Section 2.2 and has not ceased to be a Participant pursuant to Section 2.3. 1.12 "Participant's Account" or "Account" means as to any Participant the separate account maintained on the books of the Company in order to reflect the Deferral Contributions made by the Participant, and the earnings relating thereto. To the extent necessary to reflect a Participant's distribution elections, a separate Account may be maintained with respect to the amounts credited to the Participant's Account for any Plan Year. 1.13 "Plan" shall mean The Gap, Inc. Executive Capital Accumulation Plan, as set forth in this instrument and as hereafter amended from time to time. 1.14 "Salary" shall mean a Participant's basic yearly salary, excluding bonuses and taxable and nontaxable fringe benefits and excluding deferral contributions under The Gap, Inc. Executive Deferred Compensation Plan; provided, however, that Salary shall include Deferral Contributions and all amounts contributed by an Employer pursuant to a salary reduction agreement which are not includable in the Employee's gross income under sections 125, 402(a)(8),or 402(b) of the Code. 1.15 "Termination Date" shall mean a Participant's termination of employment with all Employers and Affiliates. SECTION 2 PARTICIPATION 2.1 Participation. Each Eligible Employee's decision to become a Participant shall be entirely voluntary. 2.2 Elections. An Eligible Employee may elect to become a Participant (or to reinstate active participation) in this Plan by electing to make Deferral Contributions under the Plan. 2.2.1 Deferral Elections. For the first Plan Year beginning April 1, 1994, an Eligible Employee may elect to make Deferral Contributions no later than March 31, 1994 with respect to Salary paid on and after April 1 of that Plan Year. For following Plan Years, an election to make Deferral Contributions shall be effective only for the Plan Year with respect to which the election is made, and shall be irrevocable as to amounts deferred as of the effective date of any suspension pursuant to Section 2.2.2. An Eligible Employee may elect to make Deferral Contributions for any Plan Year no later than December 31 of the preceding Plan Year. An Employee who first is determined to be an Eligible Employee as of June 1 of any Plan Year may elect before June 30 of that Plan Year to make Deferral Contributions with respect to Salary paid on and after July 1 of that Plan Year. 2.2.2 Election to Suspend Contributions. A Participant may elect, during a Plan Year for which he or she has elected Deferral Contributions, to suspend such contributions for the remainder of that Plan Year. A Participant who has elected to suspend contributions during a Plan Year may not elect further Deferral Contributions during that Plan Year. 2.2.3 Method of Elections. All elections of Deferral Contributions shall be made in writing at the times and in the manner prescribed by the Committee from time to time. 2.3 Termination of Participation. An Employee who has become a Participant shall remain a Participant until his or her entire Account balance is distributed. However, an Employee who has become a Participant may or may not be an active Participant, depending upon whether he or she is an Eligible Employee and has elected to make Deferral Contributions for such Plan Year. SECTION 3 DEFERRAL CONTRIBUTIONS 3.1 Amount of Contributions. At the times and in the manner prescribed in Section 2.2, each Eligible Employee may elect to defer up to 50% of his or her Salary for a Plan Year and to have the amounts of such deferrals credited on the books of the Company to his or her Account under the Plan. In the case of a an Eligible Employee who becomes a Participant on July 1 of any Plan Year, his or her Deferral Contributions shall be effective only with respect to payments of Salary after such date. For the first Plan Year beginning April 1, 1994, Deferral Contributions shall be effective only with respect to payments of Salary on or after April 1, 1994. 3.2 Crediting of Deferral Contributions. The amounts deferred pursuant to Section 3.1 shall be credited to the Participant's Account as of the last day of the month in which the amount would otherwise have been paid to the Participant. 3.3 Deemed Investment Return. Before the beginning of each Plan Year, the Committee shall specify a "Deemed Earnings Rate," which shall, at a minimum, be equal to the rate of return during that Plan Year on a mutual fund indexed to the S&P 500, and specified by the Committee before the beginning of each Plan Year. In no event shall the Deemed Earning Rate be less than 0%. For each Plan Year, there shall be credited to each Participant's Account an amount equal to the interest, compounded monthly, that would have been paid had the Account been deposited in a savings account paying interest at the Deemed Earnings Rate applicable to that Plan Year. SECTION 4 ACCOUNTING 4.1 Participants' Accounts. At the direction of the Committee, there shall be established and maintained for each Participant a Deferral Account to which shall be credited all Deferral Contributions made by the Participant. To the extent necessary to reflect a Participant's distribution elections, the Committee may direct the establishment of a separate Deferral Account with respect to amounts credited to a Participant's Account for any Plan Year. Each Participant's Account shall also be credited at the end of each month with deemed earnings in accordance with Section 3.3. No funds shall be set aside or earmarked for a Participant's Account, which shall be purely a bookkeeping device. 4.2 Accounting Methods. The accounting methods or formulae to be used under the Plan for the purpose of maintaining the Participants' Accounts shall be determined by the Committee and may be revised by the Committee from time to time. 4.3 Reports. Each Participant shall be furnished with periodic statements of his or her Account, reflecting the status of his or her interest in the Plan, at least annually. SECTION 5 DISTRIBUTIONS 5.1 Deferral Account. Distribution of a Participant's Deferral Account shall be made only after his or her Termination Date. Except as provided in Section 5.2, such distribution shall be made in a lump sum as soon as practicable following that Termination Date. For purposes of such distribution the value of the Participant's Deferral Account shall be determined as of the last day of the month following the Termination Date. 5.2 Installment Distributions. A Participant may elect to receive payments from his or her Account that are made after his or her Termination Date in annual installments for 5, 10 or 15 years. 5.2.1 Installment Elections. A Participant's election of installment distributions must be made at the time of his or her Deferral Contribution election for a Plan Year and shall apply only to amounts deferred with respect to that Plan Year. No such election shall be effective if the value of the Participant's Account is less than $5,000 as of the last day of the month following his or her Termination Date. 5.2.2 Installment Payments. The first installment payment shall be made as soon as practicable following the Participant's Termination date and succeeding payments shall be made on or before the last working day of April in each succeeding year. In no case, however, shall a Participant receive more than one installment payment in any calendar year. The amount to be distributed in each installment payment shall be determined by dividing the value of the Account as of the Valuation Date preceding the date of each distribution by the number of installment payments remaining to be made. The "Valuation Date" shall be: (a) for the first installment distribution, the last day of the month immediately preceding the distribution date; and (b) for all succeeding distributions, the December 31 immediately preceding each distribution date. 5.3 Death Distributions. If a Participant dies before the entire balance of his or her Account has been distributed, the remaining balance of the Participant's Account shall be distributed to his or her beneficiary in a lump sum as soon as practicable. 5.4 Payments to Incompetents. If any individual to whom a benefit is payable under the Plan is a minor, or if the Committee determines that any individual to whom a benefit is payable under the Plan is incompetent to receive such payment or to give a valid release therefor, payment shall be made to the guardian, committee or other representative of the estate of such individual which has been duly appointed by a court of competent jurisdiction. If no guardian, committee or other representative has been appointed, payment may be made to any person as custodian for such individual under the California Uniform Transfers to Minors Act or may be made to or applied to or for the benefit of the minor or incompetent, the incompetent's spouse, children or other dependents, the institution or persons maintaining the minor or incompetent, or any of them, in such proportions as the Committee from time to time shall determine; and the release of the person or institution receiving the payment shall be a valid and complete discharge of any liability of the Employers with respect to any benefit so paid. 5.5 Beneficiary Designations. Each Participant may designate, in a signed writing delivered to the Committee on such form as it may prescribe, one or more beneficiaries to receive any distribution which may become payable as the result of the Participant's death. 5.6 Undistributable Accounts. Each Participant and (in the event of death) his or her beneficiary shall keep the Committee advised of his or her current address. If the Committee is unable to locate the Participant or beneficiary to whom a Participant's Account is payable under this Section 5, the Participant's Account shall be frozen as of the date on which distribution would have been completed in accordance with this Section 5, and no further earnings be credited thereto. If a Participant whose Account was frozen (or his or her beneficiary) files a claim for distribution of the Account within 7 years after the date that it was frozen, and if the Committee determines that such claim is valid, then the frozen balance shall be paid by the Company in a lump sum cash payment as soon as practicable thereafter. 5.7 Committee Discretion. Within the specific time periods described in this Section 5, the Committee shall have sole discretion to determine the specific timing of the payment of any Account balance under the Plan. SECTION 6 ADMINISTRATION OF THE PLAN 6.1 Plan Administrator. The Committee is hereby designated as the administrator of the Plan (within the meaning of section 3(16)(A) of ERISA). The Committee shall have the authority to control and manage the operation and administration of the Plan. Any member of the Committee may resign at any time by notice in writing mailed or delivered to the Board, who may remove any member of the Committee at any time and may fill any vacancy that exists. 6.2 Actions by Committee. Each decision of a majority of the members of the Committee then in office shall constitute the final and binding act of the Committee. The Committee may act with or without a meeting being called or held and shall keep minutes of all meetings held and a record of all actions taken by written consent. 6.3 Powers of Committee. The Committee shall have all powers necessary to supervise the administration of the Plan and to control its operation in accordance with its terms, including, but not by way of limitation, the following powers: (a) To interpret the provisions of the Plan and to determine any question arising under, or in connection with the administration or operation of, the Plan; (b) To determine all considerations affecting the eligibility of any Employee to become a Participant or remain a Participant in the Plan; (c) To cause one or more separate Accounts to be maintained for each Participant; (d) To cause Deferral Contributions to be credited to Participants' Accounts; (e) To establish and revise an accounting method or formula for the Plan, as provided in Section 4.2; (f) To determine the manner and form in which any distribution is to be made under the Plan; (g) To determine the status and rights of Participants and their spouses, beneficiaries or estates; (h) To employ such counsel, agents and advisers, and to obtain such legal, clerical and other services, as it may deem necessary or appropriate in carrying out the provisions of the Plan; (i) To establish, from time to time, rules for the performance of its powers and duties and for the administration of the Plan; (j) To arrange for annual distribution to each Participant of a statement of benefits accrued under the Plan; (k) To publish a claims and appeal procedure satisfying the minimum standards of section 503 of ERISA pursuant to which individuals or estates may claim Plan benefits and appeal denials of such claims; and (l) To delegate to any one or more of its members or to any other person, severally or jointly, the authority to perform for and on behalf of the Committee one or more of the functions of the Committee under the Plan. 6.4 Decisions of Committee. All decisions of the Committee, and any action taken by it in respect of the Plan and within the powers granted to it under the Plan, shall be conclusive and binding on all persons. 6.5 Administrative Expenses. All expenses incurred in the administration of the Plan by the Committee, or otherwise, including legal fees and expenses, shall be paid and borne by the Employers. 6.6 Eligibility to Participate. No member of the Committee who is also an Employee shall be excluded from participating in the Plan if otherwise eligible, but he or she shall not be entitled, as a member of the Committee, to act or pass upon any matters pertaining specifically to his or her own Account under the Plan. 6.7 Indemnification. Each of the Employers shall, and hereby does, indemnify and hold harmless the members of the Committee, from and against any and all losses, claims, damages or liabilities (including attorneys' fees and amounts paid, with the approval of the Board, in settlement of any claim) arising out of or resulting from the implementation of a duty, act or decision with respect to the Plan, so long as such duty, act or decision does not involve gross negligence or willful misconduct on the part of any such individual. SECTION 7 FUNDING 7.1 Unfunded Plan. All amounts credited to a Participant's Account under the Plan shall continue for all purposes to be a part of the general assets of the Company. The interest of the Participant in his or her Account, including his or her right to distribution thereof, shall be an unsecured claim against the general assets of the Company. Although the Company may choose to invest a portion of its general assets for purposes of enabling it to make payments under the Plan, nothing contained in the Plan shall give any Participant or beneficiary any interest in or claim against any specific assets of the Company. SECTION 8 MODIFICATION OR TERMINATION OF PLAN 8.1 Employers' Obligations Limited. The Plan is voluntary on the part of the Employers, and the Employers do not guarantee to continue the Plan. Complete discontinuance of all Deferral Contributions shall be deemed a termination of the Plan. 8.2 Right to Amend or Terminate. The Board reserves the right to alter, amend or terminate the Plan, or any part thereof, in such manner as it may determine, for any reason whatsoever. Any alteration, amendment or termination shall take effect upon the date indicated in the document embodying such alteration, amendment or termination, provided that no such alteration or amendment shall divest any amount already credited to a Participant's Account under the Plan. The Company may (but shall have no obligation to) seek a private letter ruling from the Internal Revenue Service regarding the tax consequences of participation in the Plan. If such private letter ruling is sought, the Committee shall have the right to adopt such amendments to the Plan (whether retroactive or prospective) that the Internal Revenue Service may require as a condition to the issuance of such ruling. 8.3 Effect of Termination. If the Plan is terminated, the balances credited to the Accounts of the affected Participants shall be distributed to them at the time and in the manner set forth in Section 5; provided, however, that the Committee, in its sole discretion, may authorize accelerated distribution of Participants' Accounts as of any earlier date. SECTION 9 GENERAL PROVISIONS 9.1 Inalienability. In no event may either a Participant, a former Participant or his or her spouse or estate sell, transfer, anticipate, assign, hypothecate, or otherwise dispose of any right or interest under the Plan; and such rights and interests shall not at any time be subject to the claims of creditors nor be liable to attachment, execution or other legal process. 9.2 Rights and Duties. Neither the Employers nor the Committee shall be subject to any liability or duty under the Plan except as expressly provided in the Plan, or for any action taken, omitted or suffered in good faith. 9.3 No Enlargement of Employment Rights. Neither the establishment or maintenance of the Plan, the making of any Deferral Contributions nor any action of any Employer or the Committee, shall be held or construed to confer upon any individual any right to be continued as an Employee nor, upon dismissal, any right or interest in any specific assets of the Employers other than as provided in the Plan. Each Employer expressly reserves the right to discharge any Employee at any time. 9.4 Apportionment of Costs and Duties. All acts required of the Employers under the Plan may be performed by the Company for itself and its Affiliates, and the costs of the Plan may be equitably apportioned by the Committee among the Company and the other Employers. Whenever an Employer is permitted or required under the terms of the Plan to do or perform any act, matter or thing, it shall be done and performed by any officer or employee of the Employer who is thereunto duly authorized by the board of directors of the Employer. 9.5 Applicable Law. The provisions of the Plan shall be construed, administered and enforced in accordance with the laws of the State of California. 9.6 Severability. If any provision of the Plan is held invalid and unenforceable, its invalidity or unenforceability shall not affect any other provision of the Plan, and the Plan shall be construed and enforced as if such provision had not been included. 9.7 Captions. The captions contained in and the table of contents prefixed to the Plan are inserted only as a matter of convenience and for reference and in no way define, limit, enlarge or describe the scope or intent of the Plan nor in any way shall affect the construction of any provision of the Plan. EX-11 3 THE GAP, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE Fifty-two weeks ended January 28, January 29, January 30, 1995 1994 1993 Net earnings ($000) $320,240 $258,424 $210,701 Weighted average shares of common stock outstanding during the period 145,570,538 144,841,137 143,672,924 Add incremental shares from assumed exercise of stock options (primary) 574,059 687,009 1,054,393 146,144,597 145,528,146 144,727,317 Primary earnings per share $ 2.19 $ 1.78 $ 1.46 Weighted average shares of common stock outstanding during the period 145,570,538 144,841,137 143,672,924 Add incremental shares from assumed exercise of stock options (fully-diluted) 589,416 973,372 1,083,742 146,159,954 145,814,509 144,756,666 Fully-diluted earnings per share $ 2.19 $ 1.77 $ 1.46 NOTE: The information provided in the exhibit is presented in accordance with Regulation S-K, Item 601(b)(11), while net earnings per share on the Consolidated Statements of Earnings is presented in accordance with APB Opinion 15. This information is not required under APB Opinion 15, as the difference between primary and fully - diluted earnings per share and earnings per share calculated on a weighted average share basis is less than 3%. EX-13 4
Five-Year Selected Financial Data Fiscal Years 1994 1993 1992 1991 1990 Operating Results ($000) Net sales $3,722,940 $3,295,679 $2,960,409 $2,518,893 $1,933,780 Cost of goods sold and occupancy expenses, excluding depreciation and amortization 2,202,133 1,996,929 1,856,102 1,496,156 1,187,644 Percentage of net sales 59.2% 60.6% 62.7% 59.4% 61.4% Depreciation and amortization 148,863 124,860 99,451 72,765 53,599 Operating expenses 853,524 748,193 661,252 575,686 454,180 Net interest (income) expense (10,902) 809 3,763 3,523 1,435 Earnings before income taxes 529,322 424,888 339,841 370,763 236,922 Percentage of net sales 14.2% 12.9% 11.5% 14.7% 12.3% Income taxes 209,082 166,464 129,140 140,890 92,400 Net earnings 320,240 258,424 210,701 229,873 144,522 Percentage of net sales 8.6% 7.8% 7.1% 9.1% 7.5% Cash dividends 64,775 53,041 44,106 41,126 29,625 Capital expenditures 236,616 215,856 213,659 244,323 199,617 Per Share Data Net earnings $2.20 $1.78 $1.47 $1.62 $1.02 Cash dividends .46 .38 .32 .30 .22 Stockholders' equity (book value) 9.50 7.76 6.16 4.76 3.30 Excludes amortization of restricted stock. Includes property and equipment, as well as lease rights. Reflects the 2-for-1 splits of common stock to stockholders of record on June 17, 1991 and September 17, 1990. Based on weighted average number of shares outstanding at year-end. Based on actual number of shares outstanding at year-end.
Five-Year Selected Financial Data Fiscal Years 1994 1993 1992 1991 1990 Financial Position ($000) Property and equipment (net) $ 828,777 $ 740,422 $ 650,368 $ 547,740 $ 383,548 Merchandise inventory 370,638 331,155 365,692 313,899 247,462 Total assets 2,004,244 1,763,117 1,379,248 1,147,414 776,900 Working capital 555,827 494,194 355,649 235,537 101,518 Current ratio 2.11:1 2.07:1 2.06:1 1.71:1 1.39:1 Total debt, less current installments - 75,000 75,000 80,000 17,500 Ratio of total debt to stockholders' equity N/A .07:1 .08:1 .12:1 .04:1 Stockholders' equity 1,375,232 1,126,475 887,839 677,788 465,733 Return on average stockholders' equity 25.6% 25.7% 26.9% 40.2% 36.0% Statistics Number of stores opened 172 108 117 139 152 Number of stores expanded 82 130 94 79 56 Number of stores closed 34 45 26 15 20 Number of stores open at year-end 1,508 1,370 1,307 1,216 1,092 Net increase in number of stores 10.1% 4.8% 7.5% 11.4% 13.8% Comparable store sales growth (52-week basis) 1.0% 1.0% 5.0% 13.0% 14.0% Sales per square foot (52-week basis) $444 $463 $489 $481 $438 Square footage of gross store space at year end 9,165,900 7,546,300 6,509,200 5,638,400 4,762,300 Percentage increase in square feet 21.5% 15.9% 15.4% 18.4% 17.4% Number of employees at year end 55,000 44,000 39,000 32,000 26,000 Weighted average number of shares outstanding 145,570,538 144,841,137 143,672,924 142,139,577 141,500,888 Number of shares outstanding at year end, net of treasury stock 144,764,749 145,248,728 144,185,238 142,523,334 141,264,030 Based on weighted average monthly gross square footage.
Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS Net Sales Fiscal Year Ended Jan. 28, 1995 Jan. 29, 1994 Jan. 30, 1993 (Fiscal 1994) (Fiscal 1993) (Fiscal 1992) Net sales ($000) $3,722,940 $3,295,679 $2,960,409 Total net sales growth percentage 13 11 18 Comparable store sales growth percentage 1 1 5 Net sales per average square foot 444 463 489 Number of New stores 172 108 117 Expanded stores 82 130 94 Closed stores 34 45 26 The total net sales growth reflected above for fiscal 1994 and 1993 is primarily attributable to the opening of new stores (net of stores closed), and the expansion of existing stores. Net sales per average square foot were $444 in 1994, $463 in 1993, and $489 in 1992. Over the past five years the Company has increased the average size of its new stores and expanded existing stores as a long-term investment resulting in a total store square footage increase of 21 percent in 1994, 16 percent in 1993, and 15 percent in 1992. The expansion program negatively impacted net sales per average square foot in 1994 and 1993. Along with the expansion program, the continued store growth in the Old Navy division with lower priced merchandise and significantly larger stores will put pressure on net sales per average square foot in 1995. Cost of Goods Sold and Occupancy Expenses Cost of goods sold and occupancy expenses as a percentage of net sales were 63.2 percent in 1994, 64.4 percent in 1993, and 66.1 percent in 1992. The resulting 1.2 percentage point increase in gross margin net of occupancy expenses in 1994 from 1993 was attributable to a 1.6 percentage point increase in merchandise margins as a percentage of net sales offset by a .4 percentage point in-crease in occupancy expenses as a percentage of net sales. The increase in merchandise margins in 1994 from 1993 was primarily attributable to higher initial merchandise margins partially offset by a larger percentage of merchandise sold at markdown prices. Entering 1995, inventory on hand is at a lower initial merchandise margin than inventory on hand last year. The 1.7 percentage point increase in gross margin net of occupancy expenses in 1993 from 1992 was attributable to a 2.5 percentage point increase in merchandise margins as a percentage of net sales offset by a .8 percentage point increase in occupancy expenses as a percentage of net sales. The increase in merchandise margins in 1993 from 1992 was primarily attributable to more merchandise being sold at regular prices and higher initial merchandise margins. Over the past two years the Company has operated at near record levels of merchandise margin when compared to the same periods of previous years, making future comparisons more challenging. This is especially true in the first half of 1995. The Company reviews its inventory levels in order to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and uses markdowns to clear merchandise. Such markdowns may have an adverse impact on earnings, depending upon the extent of the markdown and the amount of inventory affected. The increase in occupancy expenses as a percentage of net sales between 1994 and 1993, as well as between 1993 and 1992, was primarily attributable to the addition of larger new stores and the expansion of existing stores. Operating Expenses Operating expenses as a percentage of net sales were 22.9 percent, 22.7 percent, and 22.3 percent for fiscal years 1994, 1993, and 1992. The .2 percentage point increase in 1994 from 1993 as a percentage of net sales was primarily attributable to investments in payroll and advertising expenses to support the growth of the Old Navy and International divisions and an increased focus on customer service for all divisions. These increases were partially offset by a beneficial comparison to last year when $10 million of expense was recognized to support a store refixturing program. The .4 percentage point increase in 1993 from 1992 was attributable to increases in bonus expense of .5 percentage points and a provision for a write-off of certain store fixtures of .3 percentage points as a percentage of net sales. These increases were partially offset by a .4 percentage point decrease in advertising costs as a percentage of net sales. Net Interest Income/Expense Net interest income was $10.9 million for fiscal year 1994 compared to net interest expense of $809,000 and $3.8 million for fiscal years 1993 and 1992. The change in 1994 from 1993 is attributable to an increase in gross average investments including long-term investments and higher average interest rates. The decrease in interest expense in 1993 from 1992 was attributable to an increase in gross average investments partially offset by lower average interest rates. Income Taxes The effective tax rate was 39.5 percent in 1994 compared to 39.2 percent in 1993 and 38.0 percent in 1992. The increase in the effective tax rate for 1994 and 1993 reflects changes in federal income tax law at the end of the second quarter in fiscal year 1993. LIQUIDITY AND CAPITAL RESOURCES The following sets forth certain material measures of the Company's liquidity: Fiscal Year 1994 1993 1992 Cash provided by operating activities ($000) $504,450 $551,298 $306,978 Working capital ($000) 555,827 494,194 355,649 Current ratio 2.11:1 2.07:1 2.06:1 For the fiscal year ended January 28, 1995, the decrease in cash provided by operating activities was primarily attributable to increased income tax payments and increases in inventory purchases resulting from the Company's expansion into the Old Navy and International divisions, which more than offset an increase in net earnings exclusive of depreciation expense. For 1993, the Company's improved cash flow and working capital was due to an increase in earnings before depreciation expense, an increase in income taxes payable as well as improved inventory management which resulted in decreased inventory levels. (See accompanying Consolidated Financial Statements). The Company funds inventory expenditures during normal and peak periods through a combination of cash flows provided by operations and normal trade credit arrangements. The Company's business follows a seasonal pattern, peaking over a total of about ten weeks during the late summer and holiday periods. During 1994 and 1993, these periods accounted for approximately 30% of the Company's annual sales. Capital expenditures, net of construction allowances and dispositions, totaled approximately $220 million in 1994. These expenditures resulted in a net increase in store space of approximately 1.6 million square feet or 21 percent due to the addition of 172 new stores, the expansion of 82 stores, and the remodeling of certain stores. Capital expenditures for 1993 and 1992 were $200 million and $203 million respectively, resulting in a net increase in store space of approximately 1 million square feet or 16 percent in 1993 and approximately 871,000 square feet or 15 percent in 1992. Expenditures in 1994 and 1993 included costs for administrative facilities and equipment. For fiscal year 1995, the Company expects capital expenditures to total approximately $275 to $300 million, net of construction allowances, representing the addition of approximately 175 to 200 new stores, the expansion of approximately 50 to 70 stores, and the remodeling of certain stores. Planned expenditures also include amounts for administrative facilities, distribution centers, and equipment. The Company expects to fund such capital expenditures with cash flow from operations. Square footage growth is expected to be approximately 20 percent net of store closings. New stores are generally expected to be leased. The Company continues to explore alternatives for expanding its headquarters facilities in San Francisco and San Bruno, California. The Company has a credit agreement which provides for a $250 million revolving credit facility until March 1997. In addition, the credit agreement provides for the issuance of letters of credit up to $350 million at any one time. The Company had outstanding letters of credit of approximately $260 million at January 28, 1995. In June 1994, the Company repaid $75 million of long-term debt which had been outstanding since February 1991, with an original maturity date of February 1995. During the first quarter of fiscal 1994, the Company repurchased 250,000 shares of its common stock for $10,032,000 from a senior executive of the Company. On October 25, 1994, the Board of Directors approved a program under which the Company may repurchase up to 9 million shares of its outstanding common stock in the open market over a two year period. Under this program 1,473,500 shares were repurchased for $48,260,000 in the fourth quarter of fiscal 1994. Per Share Data Market Prices Cash Dividends Fiscal 1994 1993 1994 1993 High Low High Low 1st Quarter $49 3/8 $39 7/8 $37 1/2 $28 $.100 $.080 2nd Quarter 48 7/8 38 37 1/4 27 .120 .100 3rd Quarter 44 3/4 30 1/8 35 3/4 25 1/2 .120 .100 4th Quarter 38 5/8 28 7/8 42 7/8 33 3/4 .120 .100 Year $.460 $.380 The principal markets on which the Company's stock is traded are the New York and Pacific Stock Exchanges. The number of holders of record of the Company's stock as of March 27, 1995 was 6,646. Management's Report On Financial Information Management is responsible for the integrity and consistency of all financial information presented in the Annual Report. The financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include certain amounts based on Management's best estimates and judgements. In fulfilling its responsibility for the reliability of financial information, Management has established and maintains accounting systems and procedures appropriately supported by internal accounting controls. Such controls include the selection and training of qualified personnel, an organizational structure providing for division of responsibility, communication of requirement for compliance with approved accounting, control and business practices and a program of internal audit. The extent of the Company's system of internal accounting control recognizes that the cost should not exceed the benefits derived and that the evaluation of those factors requires estimates and judgements by Management. Although no system can ensure that all errors or irregularities have been eliminated, Management believes that the internal accounting controls in use provide reasonable assurance, at reasonable cost, that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with Management's authorization, and that the financial records are reliable for preparing financial statements and maintaining accountability for assets. The financial statements of the Company have been audited by Deloitte & Touche LLP, independent auditors. Their report, which appears in the Annual Report, is based upon their audits conducted in accordance with generally accepted auditing standards. The Audit and Finance Committee of the Board of Directors is comprised solely of directors who are not officers or employees of the Company. The Committee is responsible for recommending to the Board of Directors the selection of independent auditors. It meets periodically with Management, the independent auditors, and the internal auditors to assure that they are carrying out their responsibilities. The Committee also reviews and monitors the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company's financial reports. Deloitte & Touche LLP and the internal auditors have full and free access to the Audit and Finance Committee, with and without Management's presence. Independent Auditor's Report To the Stockholders and Board of Directors of The Gap, Inc. We have audited the accompanying consolidated balance sheets of The Gap, Inc. and subsidiaries as of January 28, 1995 and January 29, 1994, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three fiscal years in the period ended January 28, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries as of January 28, 1995 and January 29, 1994, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 28, 1995 in conformity with generally accepted accounting principles. March 2, 1995
Consolidated Statements of Earnings ($000 except per share amounts)Fiscal 1994 Fiscal 1993 Fiscal 1992 Net sales $3,722,940 100.0% $3,295,679 100.0% $2,960,409 100.0% Costs and expenses Cost of goods sold and occupancy expenses 2,350,996 63.2% 2,121,789 64.4% 1,955,553 66.1% Operating expenses 853,524 22.9% 748,193 22.7% 661,252 22.3% Net interest (income) expense (10,902) (0.3%) 809 - 3,763 .1% Earnings before income taxes 529,322 14.2% 424,888 12.9% 339,841 11.5% Income taxes 209,082 5.6% 166,464 5.1% 129,140 4.4% Net earnings $ 320,240 8.6% $ 258,424 7.8% $ 210,701 7.1% Weighted average number of shares 145,570,538 144,841,137 143,672,924 Earnings per share $ 2.20 $ 1.78 $ 1.47 See notes to consolidated financial statements.
Consolidated Balance Sheets ($000) January 28, 1995 January 29, 1994 Assets Current Assets Cash and equivalents $ 414,487 $ 460,332 Short-term investments 173,543 83,497 Merchandise inventory 370,638 331,155 Prepaid expenses and other 97,019 81,454 Total Current Assets 1,055,687 956,438 Property and Equipment Leasehold improvements 639,801 556,858 Furniture and equipment 620,104 504,952 Construction-in-progress 34,989 28,670 1,294,894 1,090,480 Accumulated depreciation and amortization (466,117) (350,058) 828,777 740,422 Long-term investments 32,097 - Lease rights and other assets 87,683 66,257 Total Assets $2,004,244 $1,763,117 Liabilities and Stockholders' Equity Current Liabilities Notes payable $ 2,478 $ 7,603 Accounts payable 263,724 216,664 Accrued expenses 185,375 163,350 Income taxes payable 41,156 70,431 Deferred lease credits and other current liabilities 7,127 4,196 Total Current Liabilities 499,860 462,244 Long-Term Liabilities Long-term debt - 75,000 Deferred lease credits and other liabilities 129,152 99,398 129,152 174,398 Stockholders' Equity Common stock $.05 par value Authorized 500,000,000 shares; issued 156,972,777 and 155,733,256 shares; outstanding 144,764,749 and 145,248,728 shares 7,849 7,787 Additional paid-in capital 298,413 240,655 Retained earnings 1,282,301 1,026,836 Foreign currency translation adjustment (8,320) (8,314) Restricted stock plan deferred compensation (54,265) (48,035) Treasury stock, at cost (150,746) (92,454) 1,375,232 1,126,475 Total Liabilities and Stockholders' Equity $2,004,244 $ 1,763,117 See notes to consolidated financial statements.
Consolidated Statements of Cash Flows ($000) Fiscal 1994 Fiscal 1993 Fiscal 1992 Cash Flows from Operating Activities Net earnings $320,240 $258,424 $210,701 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 168,220 141,758 114,011 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 19,384 6,491 28,160 Deferred income taxes (24,431) (22,360) (10,525) Change in operating assets and liabilities Merchandise inventory (39,860) 33,910 (51,793) Prepaid expenses and other (10,989) (7,315) (10,970) Accounts payable 46,031 23,877 35,670 Accrued expenses 21,953 35,143 (6,460) Income taxes payable (29,241) 56,164 (21,775) Deferred lease credits and other long-term liabilities 33,143 25,206 19,959 Net cash provided by operating activities 504,450 551,298 306,978 Cash Flows from Investing Activities Purchase of short-term investments - net (90,046) (83,497) - Purchase of long-term investments (32,097) - - Purchases of property and equipment (232,776) (212,340) (205,507) Acquisition of lease rights and other assets (4,938) (3,687) (9,964) Net cash used for investing activities (359,857) (299,524) (215,471) Cash Flows from Financing Activities Net (decrease) increase in notes payable (4,583) 7,632 - Payments on long-term debt (75,000) - (5,000) Issuance of common stock 12,849 10,768 8,721 Purchase of treasury stock (58,292) - - Cash dividends paid (64,775) (53,041) (44,106) Net cash used for financing activities (189,801) (34,641) (40,385) Effect of exchange rate changes on cash (637) (103) (405) Net (decrease) increase in cash and equivalents (45,845) 217,030 50,717 Cash and equivalents at beginning of year 460,332 243,302 192,585 Cash and equivalents at end of year $414,487 $460,332 $243,302 See notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity Additional Common Stock Paid-in Retained ($000 except per share amounts) Shares Amount Capital Earnings Balance at February 1, 1992 153,007,862 $7,650 $124,683 $ 654,858 Issuance of common stock pursuant to stock option plans 609,852 30 5,749 Net issuance of common stock pursuant to management incentive restricted stock plans 1,052,052 53 51,484 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 28,160 Foreign currency translation adjustment Amortization of restricted stock Net earnings 210,701 Cash dividends ($.32 per share) (44,106) Balance at January 30, 1993 154,669,766 $7,733 $210,076 $ 821,453 Issuance of common stock pursuant to stock option plans 655,745 33 9,076 Net issuance of common stock pursuant to management incentive restricted stock plans 407,745 21 15,012 Tax benefit from exercise of stock options by employees and from vesting of restricted stock Foreign currency translation adjustment Amortization of restricted stock Net earnings 258,424 Cash dividends ($.38 per share) (53,041) Balance at January 29, 1994 155,733,256 $7,787 $240,655 $1,026,836 Issuance of common stock pursuant to stock option plans 624,806 31 10,874 Net issuance of common stock pursuant to management incentive restricted stock plans 614,715 31 27,500 Tax benefit from exercise of stock options by employees and from vesting of restricted stock Foreign currency translation adjustment Amortization of restricted stock Purchase of treasury stock Net earnings 320,240 Cash dividends ($.46 per share) (64,775) Balance at January 28, 1995 156,972,777 $7,849 $298,413 $1,282,301 See notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity Foreign Restricted Currency Stock Plan Translation Deferred Treasury Stock ($000 except per share amounts) Adjustment Compensation Shares Amount Total Balance at February 1, 1992 $ 575 ($17,524) (10,484,528) ($ 92,454) $ 677,788 Issuance of common stock pursuant to stock option plans 5,779 Net issuance of common stock pursuant to management incentive restricted stock plans (48,595) 2,942 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 28,160 Foreign currency translation adjustment (7,985) (7,985) Amortization of restricted stock 14,560 14,560 Net earnings 210,701 Cash dividends ($.32 per share) (44,106) Balance at January 30, 1993 ($7,410) ($51,559) (10,484,528) ($ 92,454) $ 887,839 Issuance of common stock pursuant to stock option plans 9,109 Net issuance of common stock pursuant to management incentive restricted stock plans (13,374) 1,659 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 6,491 Foreign currency translation adjustment (904) (904) Amortization of restricted stock 16,898 16,898 Net earnings 258,424 Cash dividends ($.38 per share) (53,041) Balance at January 29, 1994 ($8,314) ($48,035) (10,484,528) ($ 92,454) $ 1,126,475 Issuance of common stock pursuant to stock option plans 10,905 Net issuance of common stock pursuant to management incentive restricted stock plans (25,587) 1,944 Tax benefit from exercise of stock options by employees and from vesting of restricted stock 19,384 Foreign currency translation adjustment (6) (6) Amortization of restricted stock 19,357 19,357 Purchase of treasury stock (1,723,500) (58,292) (58,292) Net earnings 320,240 Cash dividends ($.46 per share) (64,775) Balance at January 28, 1995 ($8,320) ($54,265) (12,208,028) ($150,746) $ 1,375,232 See notes to consolidated financial statements.
Notes to Consolidated Financial Statements For the Fifty-Two Weeks ended January 28, 1995 (Fiscal 1994), January 29, 1994 (Fiscal 1993), January 30, 1993 (Fiscal 1992). Note A: Summary of Significant Accounting Policies The Company is an international specialty retailer which operates stores selling casual apparel for men, women, and children under a variety of brand names including: Gap, GapKids, babyGap, Banana Republic, and Old Navy Clothing Co. The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated. Cash and equivalents represent cash and short-term, highly liquid investments with original maturities of three months or less. Short-term investments include investments with an original maturity of greater than three months or a remaining maturity of less than one year. Long-term investments include investments with an original and remaining maturity of greater than one year and less than five years. The Company's short and long-term investments consist primarily of debt securities which have been classified as held to maturity and are carried at amortized cost which approximates fair market value. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, as of January 30, 1994. The adoption of SFAS No. 115 had no material effect on the Company's consolidated financial statements for the year ended January 28, 1995. Merchandise inventory is stated at the lower of FIFO (first-in, first-out) cost or market. Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets or lease terms, whichever is less. Lease rights are recorded at cost and are amortized over 12 years or the lives of the respective leases, whichever is less. Costs associated with the opening or remodeling of stores, such as pre-opening rent and payroll, are charged to expense as incurred. The net book value of fixtures and leasehold improvements for stores scheduled to be closed or expanded within the next fiscal year is charged against current earnings. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The Company accounts for income taxes under Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Translation adjustments result from the process of translating foreign subsidiaries financial statements into U.S.dollars. Balance sheet accounts are translated at exchange rates in effect at the balance sheet date. Resulting translation adjustments are included in stockholders' equity. Income statement accounts are translated at average exchange rates during the year. Restricted stock awards represent deferred compensation and are shown as a reduction of stockholders' equity. Earnings per share are based upon the weighted average number of shares of common stock outstanding during the period. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments, as of January 30, 1994. The adoption of SFAS No. 119 had no material effect on the Company's consolidated financial statements for the year ended January 28, 1995. Certain reclassifications have been made to the 1993 and 1992 financial statements to conform with the 1994 financial statements. Note B: Long-Term Debt and Other Credit Arrangements Long-term debt at January 29, 1994 consisted of $75 million of 8.87 percent unsecured Senior Notes, due February 1995. Interest on the Senior Notes was payable quarterly. At January 29, 1994 the fair value of the Senior Notes was approximately $78 million, based on current market rates at which the Company could borrow funds with similar remaining maturities. The excess of fair value over the principal (unrealized loss) was due entirely to significantly lower market rates since the inception of the notes to January 29, 1994. The decrease in rates used to calculate the fair value was due, in part to a decline in the original term of four years to one year. In June 1994, the Company repaid in full the unsecured Senior Notes using cash provided by operating activities. Other Credit Arrangements The Company has a credit agreement with a syndicated bank group which provides for a $250 million revolving credit facility until March 2, 1997. The revolving credit facility contains both auction and fixed spread borrowing options and serves as a back up for the issuance of commercial paper. In addition, the credit agreement provides for the issuance of letters of credit until March 2, 1997 of up to $350 million at any one time. At January 28, 1995, the Company had outstanding letters of credit totaling $259,945,000. Borrowings under the Company's loan and credit agreements are subject to the Company maintaining certain levels of tangible net worth and financial ratios. Under the most restrictive covenant of these agreements, $957,069,000 of retained earnings were available for the payment of cash dividends at January 28, 1995. Gross interest payments were $7,032,000, $7,654,000, and $7,598,000 in fiscal 1994, 1993, and 1992. Note C: Income Taxes Income taxes consisted of the following: ($000) Fiscal 1994 Fiscal 1993 Fiscal 1992 Currently Payable Federal income taxes $182,811 $150,517 $114,137 Less tax credits (12,692) (11,484) (9,080) 170,119 139,033 105,057 State income taxes 45,807 38,992 25,636 Foreign income taxes 17,587 10,799 8,972 233,513 188,824 139,665 Deferred Federal (19,911) (16,084) (10,120) State (4,520) (6,276) (405) (24,431) (22,360) (10,525) Total provision $209,082 $166,464 $129,140 The foreign component of U.S. taxable income in fiscal 1994, 1993, and 1992 was $46,224,000, $43,320,000, and $40,884,000. Deferred federal and applicable state income taxes, net of applicable foreign tax credits, have not been provided for the undistributed earnings of foreign subsidiaries (approximately $75,912,000 at January 28, 1995) because the Company intends to permanently reinvest such undistributed earnings abroad. The difference between the effective income tax rate and the United States federal income tax rate is summarized as follows: Fiscal 1994 Fiscal 1993 Fiscal 1992 Federal tax rate 35.0% 35.0% 34.0% State income taxes, less federal benefit 5.1 5.0 4.9 Other (.6) (.8) (.9) Effective tax rate 39.5% 39.2% 38.0% Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets (liabilities) consisted of the following at January 28, 1995, and January 29, 1994: ($000) January 28, 1995 January 29, 1994 Compensation and benefits accruals $29,360 $26,587 Scheduled rent 29,856 22,642 Inventory capitalization 11,035 7,933 Nondeductible accruals 20,890 17,027 Other 14,176 12,399 Gross deferred tax assets 105,317 86,588 Depreciation (18,507) (24,848) Other (5,359) (4,720) Gross deferred tax liabilities (23,866) (29,568) Net deferred tax assets $81,451 $57,020 Income tax payments were $232,869,000, $128,347,000, and $135,099,000 in fiscal 1994, 1993, and 1992. Note D: Leases The Company leases virtually all of its store premises, office facilities, and some of its distribution centers. Leases relating to store premises, distribution and office facilities expire at various dates through 2030. The aggregate minimum annual lease payments under leases in effect on January 28, 1995 are as follows: Fiscal Year ($000) 1995 $ 258,672 1996 258,622 1997 251,473 1998 245,903 1999 245,854 Thereafter 1,372,776 Total minimum lease commitment $2,633,300 For leases which contain predetermined fixed escalations of the minimum rentals, the Company recognizes the related rental expense on a straight-line basis and records the difference between the expense charged to income and amounts payable under the leases as deferred lease credits. At January 28, 1995 and January 29, 1994 this liability amounted to $70,448,000 and $52,280,000. Cash or rent abatements received upon entering into certain store leases are recognized on a straight-line basis as a reduction to rent expense over the lease term. The unamortized portion is included in deferred lease credits. Some of the leases relating to stores in operation at January 28, 1995 contain renewal options for periods ranging up to 20 years. Most leases also provide for payment of operating expenses, real estate taxes, and for additional rent based on a percentage of sales. No lease directly imposes any restrictions relating to leasing in other locations (other than radius clauses). Rental expense for all operating leases was as follows: ($000) Fiscal 1994 Fiscal 1993 Fiscal 1992 Minimum rentals $244,515 $207,249 $172,256 Contingent rentals 20,955 26,574 30,990 $265,470 $233,823 $203,246 Note E: Foreign Exchange Contracts The Company enters into foreign exchange contracts to reduce exposure to foreign currency exchange risk. These contracts are designated and effective as hedges of commitments to purchase merchandise for foreign operations. The market value gains and losses on these contracts are deferred and recognized in the income statement when the related merchandise commitments are settled. At January 28, 1995, the Company had contracts maturing at various dates through 1995, to purchase the equivalent of $54,134,000 in foreign currencies (52,241,000 Canadian dollars through September 1995, 10,560,000 British pounds through May 1995, and 2,600,000 French francs through March 1995) at the contracted rates. The deferred gains and losses on the Company's foreign exchange contracts at January 28, 1995 are immaterial. Note F: Stockholders' Equity and Stock Options Common and Preferred Stock The Company is authorized to issue 60,000,000 shares of Class B common stock which is convertible into shares of common stock on a share-for-share basis; transfer of the shares is restricted. In addition, the holders of the Class B common stock have six votes per share on most matters and are entitled to a lower cash dividend. No Class B shares have been issued. The Board of Directors is authorized to issue 30,000,000 shares of one or more series of preferred stock and to establish at the time of issuance the issue price, dividend rate, redemption price, liquidation value, conversion features, and such other terms and conditions of each series (including voting rights) as the Board of Directors deems appropriate, without further action on the part of the stockholders. No preferred shares have been issued. In October 1994, the Board of Directors approved a program under which the Company may repurchase up to 9,000,000 shares of its outstanding common stock in the open market over a two year period. Stock Options Under the Company's Stock Option Plan, non-qualified options to purchase common stock are granted to officers and key employees at prices not less than the fair market value at the date of grant. Outstanding options at January 28, 1995 have expiration dates ranging from February 4, 1995 to December 5, 2002 and represent grants to 1,387 key employees. At January 28, 1995, the Company reserved 8,412,699 shares of its common stock for the exercise of stock options. There were 4,539,427 and 5,461,962 shares available for granting of options at January 28, 1995 and January 29, 1994. Options for 1,481,162 and 1,286,925 shares were exercisable as of January 28, 1995 and January 29, 1994. Average Price Shares Per Share Balance at February 1, 1992 3,633,347 $16.12 Granted 672,396 39.33 Exercised (609,852) 9.48 Cancelled (256,426) 23.66 Balance at January 30, 1993 3,439,465 $21.27 Granted 1,001,370 28.76 Exercised (655,745) 13.89 Cancelled (209,547) 30.38 Balance at January 29, 1994 3,575,543 $24.20 Granted 1,155,400 44.89 Exercised (624,806) 17.45 Cancelled (232,865) 39.94 Balance at January 28, 1995 3,873,272 $30.55 Note G: Employee Benefit and Incentive Programs Retirement Plans The Company has a qualified defined contribution retirement plan called GapShare, which is available to employees who meet certain age and service requirements. This plan permits employees to make contributions up to the maximum limits allowable under the Internal Revenue Code. In addition, a non-qualified Supplemental Executive Retirement Plan (SERP) was established in 1988 which allows eligible employees to defer additional compensation up to a maximum amount defined in the plan. Under both plans, the Company matches all or a portion of the employee's contributions under a predetermined formula; the Company's contributions vest on behalf of the employee progressively over a seven-year period. The non-qualified Supplemental Executive Retirement Plan (SERP) was frozen on December 31, 1993 and no further employee or Company contributions have been made to the plan. Company contributions to the retirement plan and the Supplemental Executive Retirement Plan in fiscal 1994, 1993, and 1992 were $8,281,000, $6,731,000, and $5,572,000. A non-qualified Executive Deferred Compensation Plan (EDCP) was established on January 1, 1994 and a non-qualified Executive Capital Accumulation Plan (ECAP) was established on April 1, 1994. Both plans allow eligible employees to defer additional compensation up to a maximum amount defined in each plan. There are no Company matching contributions. Employee Benefits Plan The Company has established an Employee Benefits Plan (the Plan) to provide certain health and welfare benefits. Payments made to the Plan relating to benefits payable in future periods are included in prepaid expenses. Incentive Compensation Plans The Company has a Management Incentive Cash Award Plan (MICAP) for key management employees. The MICAP empowers the Compensation and Stock Option Committee to award compensation, in the form of cash bonuses, to employees based on the achievement of Company and individual performance goals. Incentive awards can also be made in the form of restricted shares of the Company's stock, under the Management Incentive Restricted Stock Plan II. Restrictions on shares generally lapse in one to five years. Compensation expense is recorded during the vesting period. An Executive Management Incentive Cash Award Plan (Executive MICAP) was established on March 22, 1994 for key executive officers. The Executive MICAP empowers the Compensation and Stock Option Committees to award compensation in the form of cash bonuses to executives based on the achievements of Company wide or divisional earnings goals for that fiscal year. Employee Stock Purchase Plan In October 1994, the Board of Directors approved an Employee Stock Purchase Plan effective December 1, 1994 subject to shareholder approval at the annual meeting of shareholders in May 1995. Under the Plan all eligible employees may purchase common stock of the Company at 85% of the lower of the closing price of the Company's common stock on the grant date or the purchase date on the New York Stock Exchange Composite Transactions Index. Employees pay for their stock purchases through payroll deductions at a rate equal to any whole percentage from 1 to 15 percent. There were no shares issued under the plan at January 28, 1995. At January 28, 1995 there were 2,000,000 shares reserved for future subscriptions. Note H: Related Party Transactions The Company has an agreement with Fisher Development, Inc. (FDI), wholly owned by the brother of the Company's chairman, setting forth the terms under which FDI may act as general contractor in connection with the Company's construction activities. During fiscal 1994, 1993, and 1992, FDI acted as general contractor for 159, 104, and 111 new stores' leasehold improvements and fixtures. In addition, FDI supervised construction of 79, 128, and 93 expansions, as well as remodels of existing stores, in fiscal 1994, 1993, and 1992. FDI construction also included administrative offices. Total cost of this construction was $142,791,000, $133,104,000, and $134,582,000, including profit and overhead costs of $10,738,000, $10,095,000, and $9,687,000. At January 28, 1995 and January 29, 1994, amounts due to FDI were $12,298,000 and $11,857,000, respectively. The terms and conditions of the agreement with FDI are reviewed annually by the Audit and Finance Committee of the Board of Directors. Note I: Quarterly Financial Information (Unaudited) Fiscal 1994 Quarter Ended ($000 except per April 30, July 30, Oct. 29, Jan. 28, Fiscal share amounts) 1994 1994 1994 1995 1994 Net sales $751,670 $773,131 $988,346 $1,209,793 $3,722,940 Gross profit 289,583 265,277 378,848 438,236 1,371,944 Net earnings 63,478 44,352 93,647 118,763 320,240 Net earnings per share .44 .30 .64 .82 2.20 Fiscal 1993 Quarter Ended ($000 except per May 1, July 31, Oct. 30, Jan. 29, Fiscal share amounts) 1993 1993 1993 1994 1994 Net sales $643,580 $693,192 $898,677 $1,060,230 $3,295,679 Gross profit 219,624 200,542 339,841 413,883 1,173,890 Net earnings 41,505 28,659 78,915 109,345 258,424 Net earnings per share .29 .20 .54 .75 1.78 EX-21 5 Subsidiary List Banana Republic (H.K.) Limited, a Hong Kong corporation Banana Republic Limited, an England and Wales corporation Banana Republic Stores Pty. Ltd., an Australia corporation Banana Republic, Inc., a California corporation GPS (Bermuda) Limited, a Bermuda corporation GPS (Delaware), Inc., a Delaware corporation GPS (EDT), Inc., a Delaware corporation GPS (European Ventures) Limited, a California corporation GPS (Great Britain) Limited, an England and Wales corporation GPS (Japan) Limited, a Delaware corporation GPS (Maryland), Inc., a Maryland corporation GPS (Puerto Rico) Limited, a California corporation GPS (U.K.) Limited, a California corporation GPS (U.S.A.) Limited, a California corporation GPS Limited, a California corporation Gap (Canada) Inc., a Canada corporation Gap (France) SA, a France corporation Gap (Germany) GmbH, a Germany corporation Gap (Ireland) Limited, an Ireland corporation Gap (Japan) K.K., a Japan corporation Gap (Puerto Rico), Inc., a Puerto Rico corporation Gap International Sourcing, Inc., a California corporation Gap International Sourcing (Singapore) Pte. Ltd., a Singapore corporation Gap International, Inc., a California corporation Goldhawk B.V., a Netherlands corporation Real Estate Ventures (Glastonbury), Inc., a Delaware corporation Real Estate Ventures (Glen Eagle), Inc., a Delaware corporation Real Estate Ventures (Wheaton), Inc., an Illinois corporation The Fisher Gap Stores, Inc., a California corporation The Gap (Far East) Limited, a Hong Kong corporation The Gap (H.K.) Limited, a Hong Kong corporation The Gap Limited, an England and Wales corporation The Pottery Barn West, Inc., a California corporation EX-23 6 Deloitte & Touche 50 Fremont Street Telephone:(415)247-4000 San Francisco, Califonria 94105-2230 Facsimile:(415)247-4329 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Post Effective Amendment No. 1 to Registration Statement No. 2-72586, Registration Statement No. 2-60029, Registration Statement No. 33-39089, Registration Statement No. 33-40505, Registration Statement No. 33-54686, Registration Statement No. 33-54688, Registration Statement No. 33-54690 and Registration Statement No. 33-56021 of The Gap, Inc. on Form S-8 of our report dated March 2, 1995 incorporated by reference in the Annual Report on Form 10-K of The Gap, Inc. for the fiscal year ended January 28, 1995. /S/Deloitte & Touche April 21, 1995 EX-27 7
5 0000039911 THE GAP, INC. 12-MOS JAN-28-1995 JAN-28-1995 414,487 173,543 0 0 370,638 1,055,687 1,294,894 466,117 2,004,244 499,860 0 7,849 0 0 1,367,383 2,004,244 3,722,940 3,722,940 2,350,996 853,524 (10,902) 0 0 529,322 209,082 320,240 0 0 0 320,240 2.20 2.20
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